August 11, 2017 In the Stacks

A Good Tax

By Bree Ermentrout, Springfield, VA

A Good Tax: Legal and Policy Issues for the Property Tax in the United States, by Joan M. Youngman and Lincoln Institute of Land Policy (Cambridge, Massachusetts: Lincoln Institute of Land Policy, 2016), 260 pages.

The term “good tax” may raise eyebrows outside the tax community, but Joan Youngman’s well-written and jargon-free book, A Good Tax: Legal and Policy Issues for the Property Tax in the United States, may convince even non-practitioners of the property tax’s merits.  Youngman is the Senior President and Chair of the Department of Valuation and Taxation at the Lincoln Institute of Land Policy in Cambridge, Massachusetts.  She is not an uncritical cheerleader and squarely recognizes weaknesses of the property tax., but she argues any deficiencies can be corrected by administrative and legislative fixes.  She tries to redress what she calls an “unbalanced” public debate stemming largely from the key attributes that make the property tax a good tax—its visibility and transparency.1 Visibility and transparency ensure that the property tax is understandable and reveal the true cost of public services, but the spotlight they create can also attract debate.

Youngman lauds property taxes as an important source of locally controlled revenue.  “At a time when many governments are facing fiscal difficulties and the need to address delayed or deferred financial obligations of all types, an effective property tax can be a valuable instrument for the common good.”2   Numbers tell the tale: over the 2005-2015 period, average inflation-adjusted collections from federal corporate income tax totaled $297 billion compared with $472 billion average local property tax collections.  Unlike sales or wage taxes “immovable property is a tax base well suited for local identification, administration, and decision making.”3 Localities can align property tax with local needs and budget.  In contrast, state income and sales taxes reflect state priorities.  Cities that try to raise local sales taxes will lose revenue to neighboring cities while higher wage taxes will drive businesses to relocate to lower tax districts.  The point is valid but Youngman doesn’t address the role of property taxes in driving mobile capital to new jurisdictions.  Presumably both businesses and individuals will seek out lower tax jurisdictions (except, of course, for those most vulnerable low-income residents who have worked hard over years to pay for their home but have scarce resources to pay a continually increasing local tax on its value).

In an excellent primer, Youngman devotes the first four chapters of A Good Tax to explaining the basics of property taxes.  The Constitution’s prohibition on direct taxation means that property tax is the domain of state and local governments.  Youngman considers this appropriate since schools and local services can have a direct impact on property value.  Originally a tax on all property, the property tax evolved into what is today primarily a tax on buildings and land.  Youngman advocates for limiting the tax to land as only the land is truly immovable and in fixed supply and typically its value does not reflect additional investment or improvements.  While recognizing that an asset tax may result in increased taxes without corresponding cash flow, she believes that this difficulty can be resolved through administrative adjustments such as deferral programs for senior citizens.

Youngman rebuts the argument that property taxes are regressive.  First, as a semantic matter, she notes that the word “regressive” is often used by non-economists as a synonym for “unfair.”  Yet some regressive revenue sources—cigarette taxes and lotteries, for example— are very popular. The unfairness argument is particularly apparent in the debate over property tax and school financing, which she notes would be contentious regardless of funding source.4   Consistent with her point that property tax weaknesses can be corrected, Youngman argues that a regressive property tax can be balanced by subsidies or progressive taxes.5   Finally, even economists differ on whether the tax is regressive, depending on variables such as the definition of income or who bears the incidence of the tax.  As a result, “[w]hether the property tax takes a higher percentage of income from poorer households than from wealthier ones turns out to be a remarkably complex inquiry.”6

After the overview, the book’s remaining eight chapters are devoted to more specialized topics.  Topics covered include tax incremental financing (TIF) issued by localities to finance economic development, and classified and differential taxation which gives preferences for various property categories such as energy efficient and historical structures.  These classifications, often driven by political deals, may create economic efficiencies.7   They may also correct problems and inequities of the property tax.

Youngman covers two other notable topics.  Conservation easements are relatively new instruments which started to increase in popularity in the 1960s.  They provide for the long-term preservation of land held in private ownership and protect open spaces.  As of 2014, 20 million acres were subject to conservation easements.8   Part of their popularity can be attributed to their qualification for charitable deduction if they meet statutory requirements.  The property tax implications are more complicated.  States differ in their treatment, but must all face the problem that some easements may increase property values, while others may decrease them.

Farmland assessments often prove controversial.  “The appropriate taxation of farmland touches on many complex issues: equitable distribution of the tax burden; assistance to family farmers in difficult financial straits; land use planning to avoid sprawl and protect open space; and promotion of agriculture as a source of production, a landscape amenity, and a way of life.”9 Taxing property for its agricultural use rather than its market value may increase farm preservation, but at the cost of current revenue.  It is hard to reconcile the goal of providing  assistance to family farmers with Youngman’s examples of New Jersey’s farmland assessment holders including the King of Morocco, Bruce Springsteen, Steve Forbes, Exxon, and Merck.10

The last two chapters of A Good Tax address tax limitations and market value assessments. Perhaps the most famous effort to limit the property tax is California’s Proposition 13, a populist property tax revolt which limited the assessed value of California property and made purchase price, not market value, the basis for assessment.  Youngman points to the two-fold inequity of Proposition 13.  First, a property’s original purchase price doesn’t reflect benefits received from public services or the owners’ ability to pay.  Second, a homeowner who has lived in a property for years will probably have benefited from rising market values.  Purchasers of identical property, possibly next-door neighbors, will pay tax based on a higher purchase price.11   As an example, Stephanie Nordlinger, who unsuccessfully challenged Proposition 13 in the Supreme Court case of Nordlinger v. Hahn, paid taxes five times greater than neighbors in comparable homes.12 This inequity creates a disincentive to sell, a problem magnified by Proposition 13’s provision allowing heirs to inherit tax assessments.13   Youngman quotes Justice Stevens’s dissent in Nordlinger v. Hahn: “Such a law establishes a privilege of a medieval character: Two families with equal needs and equal resources are treated differently solely because of their different heritage.”  Youngman discounts the effectiveness of a portability feature allowing homeowners to transfer tax savings to new residences as a possible fix because it creates complexities and is divorced from market or purchase price.14

The final chapter discusses Massachusetts Proposition 2 ½, Massachusetts’s attempt to check rising property taxes with a limit on tax rates.  Youngman does not ignore weaknesses of Proposition  2 ½, but believes that many of its negative effects,  including local revenue losses resulting in layoffs of municipal employees and reductions of local services, were alleviated by municipalities who implemented market value assessments and legislation allowing property classification as residential, open space, commercial, and industrial.15   She makes clear her preference when she notes the resulting tax “structure has remained relatively stable for over 30 years. This achievement represents an effective tax limitation that succeeded in preserving accurate market value assessments.”16

As befitting a lawyer who has authored a case book on property taxation, Youngman includes extensive citations to legal decisions. The book is not just for lawyers, though, but anyone interested in clear analysis of property tax policy.  One quibble is that the book ends without a conclusion, either a summation or a roadmap for future initiatives. This is a small point in a book that covers the landscape thoroughly to provide legal and policy guidance. 

1 Joan Youngman, A Good Tax: Legal and Policy Issues for the Property Tax in the United States (2016), at ix.

2 Id. at X.

3 Id. at 2.

4 Id. at 57.

5 Id. at 20.

6 Id. at 21.

7 Id. at 94.

8 Id. at 109.

9 Id. at 134.

10 Id. at 141.

11 Id. at 40-41.

12 Id. at 197.

13 Id. at 40-41 (quoting Nordlinger v. Hahn, 505 U.S. 1, 29–30, 112 U.S. 2326, 2341–2342, 120 L. Ed. 2d. 1, 24–25 (1992) (Stevens, J. dissenting)).

14 Id. at 211.

15 Id. at 217-219.

16 Id. at 222.